3 Levels of Strategy

3 Levels of Strategy: Corporate, Business and Functional 

Strategy is at the foundation of every decision that has to be made within an organization. If the strategy is poorly chosen and formulated by top management, it has a major impact on the effectiveness of employees in pretty much every department within the organization. In our previous article on ‘What is Strategy?!‘ we have already tried to define and explain what business strategy refers to and what is NOT considered to be part of strategy. In this article, we will dissect strategy in three different components or ‘Levels of Strategy‘. These three levels are: Corporate-level strategy, Business-level strategy and Functional-level strategy. Together, these three levels of strategy can be illustrated in a so called ‘Strategy Pyramid’ (Figure 1). Corporate strategy is different from Business strategy and Functional strategy. Even though Corporate-level strategy is at the top of the pyramid, we start this article by explaining Business-level strategy first.

Figure 1: Three Levels of Strategy Pyramid

Business-level strategy

The Business-level strategy is what most people are familiar with and is about the question “How do we compete?”, “How do we gain (a sustainable) competitive advantage over rivals?”. In order to answer these questions, it is important to first have a good understanding of a business and its external environment. At this level, we can use internal analysis frameworks like the Value Chain Analysis and the VRIO Model and external analysis frameworks like Porter’s Five Forces and PESTEL Analysis. When the good strategic analysis has been done, top management can move on to strategy formulation by using frameworks as the Value Disciplines, Blue Ocean Strategy and Porter’s Generic Strategies. In the end, the business-level strategy is aimed at gaining a competitive advantage by offering true value for customers while being a unique and hard-to-imitate player within the competitive landscape.

Functional-level strategy

Functional-level strategy is concerned with the question “How do we support the business-level strategy within functional departments, such as Marketing, HR, Production and R&D?”. These strategies are often aimed at improving the effectiveness of a company’s operations within departments. Within this department, workers often refer to their ‘Marketing Strategy’, ‘Human Resource Strategy’ or ‘R&D Strategy’. The goal is to align these strategies as much as possible with the greater business strategy. If the business strategy is for example aimed at offering products to students and young adults, the marketing department should target these people as accurately as possible through their marketing campaigns by choosing the right (social) media channels. Technically, these decisions are very operational in nature and are therefore NOT part of the strategy. As a consequence, it is better to call them tactics instead of strategies.

Corporate-level strategy

At the corporate level strategy, however, management must not only consider how to gain a competitive advantage in each of the lines of businesses the firm is operating in but also which businesses they should be in in the first place. It is about selecting an optimal set of businesses and determining how they should be integrated into a corporate whole: a portfolio. Typically, a major investment and divestment decisions are made at this level by top management. Mergers and Acquisitions (M&A) is also an important part of corporate strategy. This level of strategy is only necessary when the company operates in two or more business areas through different business units with different business-level strategies that need to be aligned to form an internally consistent corporate-level strategy. That is why corporate strategy is often not seen in small-medium enterprises (SME’s), but in multinational enterprises (MNE’s) or conglomerates.

 

Example Samsung

Let’s use Samsung as an example. Samsung is a conglomerate consisting of multiple strategic business units (SBU’s) with a diverse set of products. Samsung sells smartphones, cameras, TVs, microwaves, refrigerators, laundry machines, and even chemicals and insurances. Each product or strategic business unit needs a business strategy in order to compete successfully within its own industry. However, at the corporate level Samsung has to decide on more fundamental questions like: “Are we going to pursue the camera business in the first place?” or “Is it perhaps better to invest more into the smartphone business or should we focus on the television screen business instead?”. The BCG Matrix or the GE McKinsey Matrix are both portfolio analysis frameworks and can be used as a tool to figure this out.

Figure 2: Hierarchy of Strategy

Levels of Strategy In Sum

The most common level of strategy is Business strategy and exist within strategic business units with as goal to gain competitive advantage in a certain market. If a company has multiple SBU’s, there needs to be an overarching Corporate strategy that ties all SBU’s together through corporate configuration. Here, top management must decide on resource allocation and where to invest and where to divest. Lastly, Functional strategy exist within departments such as Marketing, HR and Production. Ideally, we should refer to tactics instead of strategies because of the operational nature of the decisions made within these departments.